Frank DeFilippo: Internet Shoppers are being Ripped Off By a Hidden Charge Disguised as a Tax

Photo from Pexels.com.

There’s a sneaky little tax that most Maryland consumers don’t realize they’re paying. Technically it’s not a tax, but it performs like one, picking the pockets of internet shoppers by nickels and dimes, and sometimes dollars, and enriching the state treasury by untold thousands if not millions.

Or, could it be that online sellers cloak the charge as a tax and pocket the difference for themselves.

It soaks the rich as well as the poor, anyone buying anything from a yacht to a tube of toothpaste. Buyers may usually beware, but this incidental add-on is so vague and elusive that it escapes most notice.

Frank A. DeFilippo

So be cautioned, right up front, that this is no nefarious scheme by state government to extract a few extra dollars from unaware consumers, even though the treasury might be the beneficiary. It’s more of a skim than a scam, a computer program neglect, to be charitable, and not a greedy reach of an avaricious big brother.

The unforeseen collectable was especially significant during the pandemic lock-down when bricks-and-mortar stores were off-limits and internet shopping was a form of relief as well as a release from the demons of isolation.

Here’s how the grammatical structure flim-flam works: When making a purchase online that carries with it a shipping and handling charge, “handling” is a taxable item but “shipping” charges are not. That distinction is because some services such as “handling” are taxable and fall in the category of “use.”

However — and this can be a costly however — when “shipping and handling” charges are combined into a single total on the bill, the two are taxed as a single charge. That occurs because of a kink in the vendor’s computer billing system.

The vendor, intentionally or not, neglected to program the items separately. If there is no shipping charge, the buyer pays only the 6 % Maryland sales tax on the purchase and escapes the added charge.

Thus, the sales tax, where applicable, is calculated on the total charge for “shipping and handling,” giving the state treasury — or the seller — a hidden and hefty bonus at taxpayers’ expense.

Example: A recent online purchase was billed at $49.95 (a nickel short of free shipping). The shipping and handling charge was $6. So the 6% sales tax was applied to the total bill — $49.95 plus $6 shipping and handling charge — boosting the sales tax to $3.36 and the cost of the overall transaction to $59.31.

Even credit card companies benefit from the add-on. Bankers charge sellers interest on the total amount of a purchase for the use of their money, usually 3 %. And if a cardholder does not pay off a balance monthly, the consumer is paying as much as 24 % or more in interest on an unpaid balance which includes shipping and handling charges.

It’s no big deal out-of-pocket change on a single purchase, but on the countless orders processed for Maryland internet shoppers the small change could be a boon to the state treasury, or the seller. What’s more, those consumers who reject in-person shopping in big-box stores can really get socked on purchases such as major appliances, furniture and the like.

Only the vendors can correct the combined billing arrangement, if it’s worth the trouble to them because they are not supposed to receive a financial windfall from the deal, but who really knows.

Whether it’s the state or the online sellers who are benefiting, somebody’s pocketing money that rightfully belongs to Internet shoppers — all Maryland taxpayers.

The sales tax was first introduced in Maryland in 1947 by Gov. William Preston Lane Jr. (D).

It was 1%, or a penny on the dollar, and was to be used to fund road improvements. Among the improvements launched by Lane was the construction of the Chesapeake Bay Bridge, impossible today to live without.

The sales tax was as unfamiliar as it was unpopular. Everywhere Lane went, Marylanders tossed pennies at the otherwise effective and popular governor. His Republican opponent in the 1950 election, Theodore R. McKeldin Jr., encouraged the mocking gesture by adopting the campaign slogan, “Pennies for Lane.”

McKeldin defeated Lane by 94,000 votes, reversing the results of the 1946 election in which Lane defeated McKeldin.

The General Assembly, with Gov. Lawrence J. Hogan Jr.’s (R) signature, added the sales tax to online purchases in 2019 following the Supreme Court’s 2018 ruling that Internet sellers must collect sales taxes where applicable and remit them to the states.

The sales and use tax has been much maligned over the years as being a “regressive” tax because, it is argued, it hits hardest on those who can least afford to pay it.

The sales tax is Maryland’s second largest source of revenue after the income tax. The sales tax raises more than $5 billion a year and contributes 11% of the $49 billion state budget. The income tax raises $11 billion and constitutes 23% of the budget.

Over the years the sales tax has grown to its current rate of 6%. Fifty years ago, for example, the rate was raised to 4% — at today’s rate, that’s only a growth of only 2 percentage points in half a century while the state budget has grown by $48 billion from little more than $1 billion in 1970, an average growth rate of roughly $1 billion a year for 50 years.

Maryland’s sales tax rate is ranked No. 38 in the nation, tied with the District of Columbia. Virginia recently raised its state sales tax rate to 6.5%.

Yet the reverse can be argued as well. The sales tax can actually be considered more “progressive” than what is routinely called the “progressive income tax” – progressive because its rates are graduated across income levels but in a sense have flattened due to other adjustments to help close the wealth gap.

Moreover, the income tax is riddled with angles and loopholes that offer tax dodges and ways to game the system for those who can afford tax lawyers and lobbyists to run interference for them. For example, money is money yet earned income is taxed at almost twice the rate as unearned income or capital gains.

The Internal Revenue Code is 9,000 pages and 1 million words long. War and Peace is about half that length at 560,000 words. Any government document as long as the Internal Revenue Code contains lots of room for mischief.

So here’s the kicker: Everyone pays the same sales tax rate, whether it’s Joe Schlump or Donald Trump. Nobody escapes it. There are no dodges or loopholes. In that sense, the sales tax captures everyone which is about as equalized and progressive as any law can be. The income tax is exactly the opposite.

Justice Oliver Wendell Holmes observed in 1927 that “Taxes are the price we pay for a civilized society.” In today’s crazy world, that seems like a waste of money.

Frank A. DeFilippo
Frank A. DeFilippo is an award-winning political commentator who lives and writes in Baltimore. DeFilippo has been writing about the comic opera of politics for more than 50 years. He reported on the Maryland General Assembly for 10 years before joining the administration of former Gov. Marvin Mandel (D) as press secretary and speechwriter. Between times, he was a White House correspondent during the administration of President Lyndon Baines Johnson, and he has covered six national political conventions. DeFilippo is the author of Hooked, an alleged work of fiction, and an unpublished manuscript, Shiksa: The Rise and Fall of Marvin Mandel.